Yellen Waives Non-Custodial Crypto Protocols From New Reporting Standards

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U.S. Treasury Secretary Janet Yellen said non-custodial protocols will not be subjected to stringent reporting obligations in line with updated guidance concerning crypto assets from the Financial Action Task Force (FATF), an intergovernmental organization that sets anti-money laundering guidelines for dozens of nations. 

FATF finalized its updated guidance in late October calling on nations to subject DeFi protocols to anti-money laundering standards, including the collection and sharing of detailed information relating to transactional counterparties. 

“Creators, owners and operators or some other persons who maintain control or sufficient influence in the DeFi arrangements, even if those arrangements seem decentralized, may fall under the FATF definition of a [Virtual Asset Provider (VASP)] where they are providing or actively facilitating VASP services,” the guidance reads. 

Regulatory Classifications

However, the FATF did not recommend that software itself be targeted, but rather individuals and companies who may be the ultimate beneficiaries of decentralized protocols that skirt regulations.

This week, Yellen clarified that non-custodial entities that do not neatly fall within existing regulatory classifications will not be expected to adhere to the reporting requirements. She made the comments in a written response to questions from Senator Pat Toomey. 

Toomey had highlighted that the FATF’s guidance contradicts the current position of the Financial Crimes Enforcement Network (FinCEN), an agency inside the Treasury Department. 

Yellen responded that FATF did not intend for the new standards to regulate persons that “provide only ancillary services or products to a virtual asset network, including hardware wallet manufacturers, providers of unhosted wallets, software developers, or miners that are not otherwise engaged in covered activities.”

Network Validators

The discussion follows vigorous debate surrounding reporting requirements for crypto providers that were amended to the Biden administration’s $1T infrastructure bill. The bill was passed by Congress and signed into law by President Biden earlier this month, and includes language that could impose stringent reporting requirements on network validators and software developers that are ill-equipped to meet the obligations.

However, after the bill passed through the Senate in August, an anonymous Treasury official told CNBC that regulators will not target non-broker entities despite the bill’s language failing to exempt such, noting that only entities that are able to comply will be expected to meet reporting obligations.

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